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Costello's credibility in crisis as RBA raises inflation forecast.

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Media Statement - 12th November 2007

Costello's Credibility In Crisis As RBA Raises Inflation Forecast

Wayne Swan

The Reserve Bank has today confirmed that Peter Costello has misjudged the inflation and interest rate pressures in the Australian economy, with inflation remaining uncontained and set to worsen next year.

The Reserve Bank’s Quarterly Statement on Monetary Policy has revised upwards its inflation forecast for both core and headline inflation from 3 per cent to 3 ¼ per cent in the year to June 2008 - well above the RBA’s 2 to 3 per cent comfort zone.

The Reserve Bank noted that:

“In the near term, given tight capacity conditions in many sectors, the recent inflation pressures are likely to persist.”

The Reserve Bank’s higher inflation forecast is another major blow to Mr Costello’s economic credibility after the Treasurer declared in July this year that “inflation is right where we want it”. (26 June 2007, following June quarter CPI data release).

In fact just three weeks ago Mr Costello was still bragging about his inflation performance, when he suddenly switched his inflation focus from core to headline inflation:

“This of course is a very low average inflation rate, annual inflation rate, at 1.9 per cent and the 0.7 per cent in the September quarter is really right bang in the middle of the target range which the Government has set for consumer price inflation.” (24 October 2007, after September quarter CPI data release )

However today’s upward revision of both underlying and headline inflation - on top of last week’s tenth straight rate rise - demonstrates that Mr Costello has clearly failed to identify and contain inflation in the Australian economy.

Until Mr Costello actually accepts that he has failed to contain inflation, he will never be able to take the policy action required to put downward pressure on interest rates.

Notably, the Reserve Bank’s statement pointed to “broad-based strength in inflation”, rebutting John Howard’s claims that drought, oil prices and growth are the only causes of the inflationary pressures which prompted last week’s tenth straight rate rise.

The Reserve Bank has also added to its 20 previous warnings in the past 3 years about capacity constraints fuelling inflation, noting:

“...productive capacity is stretched and labour market conditions are tight.”

Labor’s has argued consistently over the last three years that urgent action is required to tackle capacity constraints - notably skills shortages and infrastructure bottlenecks - and lift productivity growth to start putting downward pressure on inflation.